Accounting : Meaning,Characteristics, users

Meaning of Accounting

Accounting is best understood as the language of business. It communicates the results of the business. To communicate information, needs of the users of accounting information are identified and required information is measured by following a systematic process resulting in the creation of “financial statements”.

Accounting system is a man-made system has evolved over a period of time to provide financial information to users of financial statements. In early times, accounting was merely concerned with ascertainment of results of the business. Now a day, there are lots of persons who are interested in a business (e.g. owner, govt., creditors lenders etc.) and the accounting provides them with all the relevant information through financial statements.

American Accounting Association have defined accounting as “The process of identifying, measuring and communicating information to permit judgment and decisions by the users of accounts”

Another definition is given by American Institute of Certified Public Accountants clearly brings out what is done accounting. According to it

“Accounting is an art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least of a financial character and interpreting the results thereof.”

The above definition brings out the following as characteristics of accounting:

1.Accounting is an art: Accounting is classified as an art, as it helps us in attaining our aim of ascertaining the financial results, i.e. profit or loss and financial position.

2.It involves recording, classifying and summarizing: Recording means systematically writing down the transactions and events in account books (in Journal Book) soon after their occurrence. The four basic question needs to answer while recording, i.e. what to record, when to record, how to record, and at what value to record. Classifying is the process of grouping transactions or entries of the same type at one place. This is done by opening accounts in a book called ledger. Summarizing involves the preparation of reports and statements from the classified data (ledger) which are understandable and useful to the management and other interested parties.

3.It records the transaction in terms of money: Accounting records transactions only in terms of money. Because money serves as a common unit of measurement and increases the understanding of the state of affairs of the business.

4.It records only those transactions and events, which are of financial character: accounting records only those transactions, which are of financial character, i.e. which affect the result of business. In other words, personal transactions of businessman are not recorded. But it is to be noted that if a transaction is between proprietor and business then it will be recorded because in this transaction business is involved.

5.It is an art of interpreting the result: it is also an art to determine the financial position of the business, the progress made and how well it is getting along.

Financial statements comprises of:
• Profit and Loss Account (shows profit or loss during a particular year)
• Balance Sheet (shows financial position as at the end of the financial year)
• Cash flow statement (as per listing agreement)

Users of financial statement (or simply accounting)

The importance of accounting is to provide meaningful information about a business enterprise to those persons who are directly or indirectly interested in the performance and financial position of a business enterprise. Such persons may include the following:

1.Management: In a company form of organization the owners or the shareholders elect a group of people to manage the day-to-day affairs of the company. Since these managers are ultimately responsible for the financial performance, they must periodically compile and interpret the financial statements.

2.Shareholders: The owners of the business furnish capital to be used for the purpose of carrying out business. They are interested to know whether the business incurred any profit or loss during a particular period and also its financial position on a particular date. They need accounting report in order to have an appraisal of past performance and also for an assessment of future prospects.

3.Prospective Investors: Investors look not only at the earning capacity of the business but also at its financial strength and solvency before deciding whether to subscribe or not for the shares in a company. They are interested in steady and good returns on their capital, the safety of their capital and appreciation in the value of the organization.

4.Creditors: The creditors include supplier of goods and other supplies, bankers and other lenders of money. They are interested in the financial stability of the concern before making loans or granting credit. They look at the ability of the business to pay interest and the principal amount as and when it becomes due for payment. They also look at the trends of earnings as it ultimately affects the solvency of a concern.

5.Employees: Employees are interested in the earning capacity of a concern as their salaries, bonus, and pension schemes are dependent on this factor They have a permanent stake in the business and in order to have an assurance of steady employment they are very much interested in the stability of the organization.

6.Government: Any economy of the day is, in a way, controlled and regulated by the political authorities, i.e., the government. Consequently, government agencies rely on the financial information for permitting expansion or contraction of business, for import and export of products and/or materials, for allocation of essential resources for regulating labor or imposing taxes like income tax or excise duty.

7.Researchers: Researchers are interested in accounting statements and reports in order to get data for providing their thesis on which they are working in order to complete their research projects.

8.Public: For the members of the public, the financial information is of the nature of a health examination report-it tells them about employment opportunities and general growth in the individual concern and the economy as a whole.

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